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From Antitrust Law Daily, May 23, 2016

Investors plausibly alleged antitrust injury in LIBOR action

By Jeffrey May, J.D.

Purchasers of financial instruments that carried a rate of return indexed to the London Interbank Offered Rate (LIBOR) plausibly alleged antitrust injury to pursue their price fixing claims against 16 of the world’s largest banks, the U.S. Court of Appeals in New York City decided today. Judgment in favor of the defendants on the ground that the complaints failed to plead antitrust injury was vacated. The matter was remanded to the district court to determine whether the investors were efficient enforcers of the antitrust laws, which the appellate court noted was a "closer question" (Gelboim v. Bank of America Corp., May 23, 2016, Jacobs, D.).

A number of antitrust lawsuits against the banks had been consolidated into a multi-district litigation. The appellate court explained that the district dismissed the suit, "rest[ing] in part on the syllogism that since the LIBOR-setting process was a 'cooperative endeavor,’ there could be no "anticompetitive harm." The appeal followed a 2015 decision of the U.S. Supreme Court, holding that the complaining investors had a right to appeal dismissal of their antitrust suit, even though other consolidated multidistrict cases against the banks remained pending before the district court.

Antitrust violation. The court initially held that the plaintiffs plausibly alleged an antitrust violation. They alleged a per se unlawful conspiracy to fix prices and that the banks were horizontal competitors in the sale of financial instruments that jointly set LIBOR. "LIBOR forms a component of the return from various LIBOR-denominated financial instruments, and the fixing of a component of price violates the antitrust laws," the court explained. Moreover, the appellate court noted that the "unfamiliar context" of the price fixing allegations did not justify a departure from per se treatment. Citing the U.S. Supreme Court's 1940 decision in U.S. v. Socony-Vacuum Oil Co., 310 U.S. 150, the appellate court pointed out that for price fixing, the per se rule was applicable to all industries alike.

Antitrust injury. Having identified an "illegal anticompetitive practice" in the form of horizontal price fixing, the complaining investors plausibly alleged antitrust injury. They claimed an actual injury (higher prices) flowing from the corruption of the LIBOR rate-setting process and demonstrated that their injury was one the antitrust laws were designed to prevent, the appellate court explained. The investors’ ability to negotiate the interest rates attached to particular financial instruments did not foreclose antitrust injury. Moreover, the appellate court rejected the district court's focus on the collaborative nature of the LIBOR process and its finding that the no harm to competition was pleaded.

While the LIBOR-setting process was a joint endeavor, the collaborative process was turned into collusion when the banks circumvented the LIBOR-setting rules, the appellate court found. As for harm to competition, the complaining investors did not need to make a showing of actual adverse effects in the marketplace beyond the "anticompetitive tendency: the warping of market factors affecting the prices for LIBOR-based financial instruments." The appellate court drew an analogy to the recognized competitive harm from a per se illegal agreement to fix list prices where most or all transactions occurred at lower prices.

Efficient enforcer factors. Having found adequate allegations of antitrust injury, the appellate court outlined the factors that the district court would need to consider in determining whether the investors were efficient enforcers of the antitrust laws and therefore entitled to antitrust standing. As to causation or directness of injury, the appellate court raised concerns about the standing of plaintiffs who did not deal directly with the banks and the potential for excessive damages. "Requiring the banks to pay treble damages to every plaintiff who ended up on the wrong side of an independent LIBOR-denominated derivative swap would, if appellants’ allegations were proved at trial, not only bankrupt 16 of the world’s most important financial institutions, but also vastly extend the potential scope of antitrust liability in myriad markets where derivative instruments have proliferated," the appellate court noted.

A second factor, the existence of more direct victims, might have diminished weight in this matter, the appellate court stated. A peculiar feature of the case was the fact that remote victims or those who acquired LIBOR-based instruments from non-defendant banks would be injured to the same extent and in the same way as direct customers of a the defending banks.

The case also presented "some unusual challenges" with respect to a third factor—the speculative nature of damages. "[H]ighly speculative damages is a sign that a given plaintiff is an inefficient engine of enforcement," it was noted. Even with the aid of expert testimony, the appellate court suggested that it would be difficult for the complaining investors to reach an estimate.

On remand, the district court also would have to deal with issues of duplicate recovery and damage apportionment. On the record, it was unclear how these issues would be assessed, according to the appellate court.

Allegations of conspiracy. Lastly, the appellate court rejected the banks’ contention that judgment in their favor should be upheld on the alternative ground that the appellants had not adequately alleged conspiracy. The complaining investors plausibly alleged the existence of an inter-bank conspiracy. This was not a close case, according to the appellate court. There were allegations evincing a common motive to conspire, as well as plus factors plausibly suggesting a conspiracy and economic evidence supporting an inference of conspiracy.

The case is No. 13-3565.

Attorneys: Thomas C. Goldstein and Eric F. Citron (Goldstein & Russell, P.C.) for Ellen Gelboim and Linda Zacher. Robert Frank Wise, Jr., Arthur J. Burke, and Paul S. Mishkin (Davis Polk & Wardwell LLP) for Bank of America Corp.

Companies: Bank of America Corp.

MainStory: TopStory Antitrust ConnecticutNews NewYorkNews VermontNews

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